Download The Political Economy of Structural Adjustment in

"The Political Economy of Structural Adjustment in Ghana"
J. Clark Leith and Michael F. Lofchie
in Political and Economic Interactions in Economic Policy Reform: Evidence from eight
countries
Edited by Robert H. Bates and Anne O. Krueger
INTRODUCTION
1.
2.
BACKGROUND MATERIALS
Political Background
1957 Independence Nkrumah as prime minister
Placated rioters
Economic Background
Economic collapse through 1983 when Economic Reform Program
began.
POLICY ORIGINATION
Nature of post-independence policy regime
Industrialization Policy:
Established state-owned enterprises (SOEs) as part of import
substitution policies. The SOEs had guaranteed budgets and were
insulated from market forces.
Exchange Rate Policy:
Insisted on maintaining a high fixed nominal exchange rate. This
decreased the relative price of imported K and inputs for importsubstituting industries. This also meant that exporters received
exceptionally low prices for their goods, such as cocoa. This
created an excess demand for foreign exchange. Exchange
controls were then implemented. These policies transferred
resources from the producers of exports to importers able to get
foreign exchange.
Agricultural Policy:
With the overvalued currency, exports were particularly necessary
to generate foreign exchange. However, low cocoa prices
discouraged exports. Furthermore, the cocoa marketing Board
(CMB) became a large bloated bureaucracy. Farmers' earnings on
cocoa were reduce below the world price due to: (i) undervalued
foreign exchange (ii) revenue paid to the gov't (iii) bloated costs of
CMB.
Why were inappropriate policies first pursued?
Urban bias
(a)
Overvaluation taxed exports, which are mostly rural and
provided cheap inputs to urban industry.
(b)
Suppression of producer prices of cocoa--CMB consumed a
large part of the value of the crop
(c)
3.
Labor market policies in import substituting industries gave
job security, high wages, benefits
(d)
Financial sector had low or negative real interest rates said
to favor urbanites
Dominant developmental ethos
Concerns at the time about the adverse terms-of-trade effects on
primary commodity exporters--variability of income, plus
maximizing output could have immiserizing growth. Also
concerned about a lack of an entrepreneurial class. Also low
marginal productivity of labor in agriculture.
Transaction and agency costs
In a peasant society there are high administrative costs to
collecting taxes. Then the gov't may rationally choose an inflation
tax, the overvalued currency, and the CMB.
WHY DID INAPPROPRIATE POLICIES PERSIST?
Persistence of the original reasons
Outcomes of original policies
Urban interests
While urban interests may not be a good expl. of how the
policies started, they certainly explain why they continued.
The politics in Ghana are uncertain enough that leaders
must create patronages of support to ward off coups. This
increases the incentive to give out favors to supporters.
New sources of finance for government and politics
Inflation tax
Rents on undervalued foreign exchange, import licenses
Absence of Political Resistence
Collective Action
Problems due to physical distance from capital, poor
infrastructure, the free rider problem, the agency problem,
and the differentiation of cocoa producers. Furthermore,
many Ghanians got incomes from many sources, some part
of the rent-seeking industries.
Exit not voice
Many smuggled cocoa to the Ivory Coast or Togo, many
stopped putting resources into cocoa (harvest continues for
a while), many immigrated to Nigeria. Many exited
agriculture and went into import-subst. industries.
Political repression and side payments
Why persistence beyond an optimum?
Tragedy of the commons
The regime did not act as a sole maximizer--many different
institutions could act as rent-seekers
Shrinking of the rent pool
4.
5.
Three phases to overvaluation in the face of domestic
inflation: (1) imports get cheaper, export prices fall (2)
rationing, (3) rent pool declines as exports contract
Increased political discount rate
If reforms are too costlessly in the near term then the govt is
likely to be overthrown--leads to a "live for today"
atmosphere
POLICY CHANGE IN 1983
Why Change Course?
Diminishing political glue (rents shrinking)
Shock events of 1982/3
Drought and severe food shortage
Forest fires in middle regions of the country
Murder of high court judges
Nigeria's expulsion of between 600,000 and 1,000,000 Ghanaians
who had to be reabsorbed into the Ghanaian economy
Failed coup attempts in November 1982 and June 1983
Political Space (popular support for military coup and economic reform)
Why adopt the ERP?
Prior adjustment
The scarcity of foreign exchange had changed relative prices even
though the official exchange rate had not changed. No medical or
education services, scarce inputs, broken down infrastructure.
Failed alternatives
Failure of radical people's reform to do anything but create chaos
Failure to obtain foreign assistance without economic reform
Influence of new dominant paradigm
Openness to trade now recommended.
Availability of material assistance--IMF/World Bank
NATURE OF THE ERP
Administratively easier reforms
Exchange rate reform
Auction of foreign exchange
Foreign exchange bureaus
Trade and tax reform
Uniform tariff rate
Non-inflationary govt deficit
Cocoa price reform
Somewhat stymied by falling world prices
Cocoa Board stills needs to be more efficient
Administratively and politically difficult reforms
Labor policies
Get many off the public payroll (12,000 left in 1987)
Pay people their marginal products
6.
Workers in 1987-88 survey seem to have switched from industry to
agriculture.
Financial sector policies
Improve efficiency--positive real interest rates
Build solid institutional framework--regulations and customs
Divestiture of state-owned enterprises
Not progressing well
1.
The ideological factor--are profits as wrong as rent-seeking?
2.
Rationalization of political interest--SOEs are susceptible to
favoritism
3.
Technical considerations--calculating value of assets and
liabilities
4.
Legal considerations--how to handle creditors
5.
Administrative problems--needs a gov't agency
CONCLUSION: SUSTAINABILITY OF THE ECONOMIC RECOVERY
Economic sustainability
Ambivalence toward the new economic system--want change, maybe not
capitalism.
Does a bias persist? If so, what is it?
Conclude the potential for public sector bias is still present.
Institutional reform
Financial institutions
Old habits of doing business--take-it-or-leave-it approach
Political sustainability
How can a political coalition that supports structural adjustment be
fostered?
If leaders are chosen based on opposition to structural adjustment, then
must they deliver a return to the old system?
The Rawlings government's decision to defer national political power and
keep regional centers of power may be a rational way to empower rural
agents.